FOREX-Fears of BoJ intervention keeps dollar/yen below 160

By Stefano Rebaudo

Jan 15 (Reuters) - The yen edged higher against the dollar on Thursday as investors expected a Bank of Japan intervention to shore up the currency near 160, amid concerns over expanded fiscal spending after the general election.

A break above 160.00 or the high from July 2024 at 161.95 are viewed as two important potential lines in the sand.

Prime Minister Sanae Takaichi plans to dissolve parliament's lower house next week to capitalise on a surge in public support for a new leader who has promised to spur economic growth, tackle cost-of-living concerns and tighten immigration rules.

The prospect of an early election has triggered fiscal concerns amid worries about Japan's massive debt load, dragging the yen down and complicating the rate path for the Bank of Japan.

However, this year, conditions may be more favourable to increase fiscal spending.

"In 2026, she (Takaichi) is likely to benefit from a favourable base effect in the consumer price index, as lower rice prices will drive headline inflation to moderate towards 2%," said Claire Huang, senior emerging markets macro strategist at Amundi Investment Institute.

"This benign inflation environment should buy Takaichi valuable time to advance her economic expansionism agenda."

The yen JPY= was up 0.05% at 158.33 per dollar after firming 0.4% on Wednesday as Japanese Finance Minister Satsuki Katayama renewed a verbal warning on "one-sided depreciation".

U.S. Treasury Secretary Scott Bessent urged policy measures to address FX volatility. It hit its 18-month low of 159.45 on Wednesday.

"Risks are heavily skewed to the downside for the dollar/yen in 2026,” said Stephen Jen, CEO at Eurizon SLJ Capital, mentioning the divergence in policy rate outlook between Japan and the United States.

“Interventions at the right moment could trigger such a correction,” he added, after arguing the risks are high for the Ministry of Finance to step in.

FED INDEPENDENCE IN THE SPOTLIGHT

The dollar was knocked back on Monday after Federal Reserve Chair Jerome Powell called out the subpoena from the administration of President Donald Trump, saying it amounted to intimidating the Fed into delivering easier monetary policy, but the greenback recovered its losses the day after.

Analysts are split, with some saying the latest episode strengthens the case for global diversification away from the dollar, while others argue there’s a reasonable chance the greenback will ultimately emerge stronger.

"Powell could be viewed as more resolutely hawkish in an effort to reinforce Fed independence," said Francesco Pesole, forex strategist at ING.

Against a basket of currencies, the dollar =USD was up 0.08% at 99.133, not far from the one-month high it touched last Friday at 99.268, before the subpoena was issued to Powell.

GERMAN DATA LENDS MILD SUPPORT TO EURO

The euro EUR= dropped 0.03% to $1.1640, after data showing the German economy edged back into growth after two years of recession.

Most analysts see the euro rising against the dollar in 2026 as the Federal Reserve is expected to cut rates further, though some remain cautious for the near term amid anticipation of another European Central Bank rate cut this year.

"To a good extent our bullish euro call is driven by external factors: eventually lower U.S. rates, potentially higher Fed independence risks, and China stimulus," said Michalis Rousakis, forex strategist at BofA, after saying he expects the ECB to deliver a final cut in March.

"Potential Greenland implications are seen as negative for the euro, but may be less clear-cut if any concerns led to more defence spending and challenged U.S. asset correlations," he added.

Trump's moves against U.S. major allies triggered a selloff in U.S. assets last April, including stocks and the dollar, raising doubts about the safe-haven status of the greenback.

Trump reiterated on Wednesday that the U.S. needs Greenland and that Denmark cannot be relied upon to protect the island.